Inventors Rejoice: Protecting ideas using trade secret law rather than the patent system

July 8, 2014

Commercial LitigationTrade Secrets

Inventors Rejoice: Protecting ideas using trade secret law rather than the patent system

July 8, 2014

How many times have you heard this story before (as for us, too many times)—John Doe Inventor conceives of a great idea, but decides for many reasons not to apply for a patent. He approaches ABC Company and offers to allow ABC to commercialize the idea. The inventor discloses the idea to ABC under a nondisclosure agreement, but nothing more happens, and the parties go their separate ways. A year later, however, the inventor hears about ABC Company’s efforts to sell a product that appears to contain his idea. Lacking a patent, one might think the inventor is out of luck in terms of seeking compensation for the use of his idea. But, a recent California Court of Appeals decision suggests otherwise. Indeed, Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc. (2014) is a good reminder that general concepts and ideas may also be protected as trade secrets.

The facts of Altavion v. Konica Minolta are similar to John Doe Inventor’s situation. Dr. Ali Moussa founded Altavion, Inc. to develop a proprietary digital stamping technology (DST) to enable the self-authentication of digital and paper documents. Altavion was introduced to Konica Minolta Systems Laboratory, Inc. (KMSL) and ultimately entered into a nondisclosure agreement (NDA) so that, among other things, Altavion could share its confidential information concerning its DST technology. Over the next year, KMSL evaluated Altavion’s DST and the parties attempted to negotiate commercial terms for a business arrangement—even eventually entering into a memorandum of understanding (MOU) under the terms of which KMSL recognized the proprietary nature of Altavion’s DST and promised to protect it as intellectual property.

Unbeknownst to Altavion, in the month before KMSL signed the MOU (and well after the NDA was in place), KMSL filed patent applications on a technology remarkably similar to Altavion’s proprietary DST. Unsurprisingly, KMSL began to show less interest in a commercial relationship with Altavion, and the parties’ negotiations ended in an impasse a few months later. Approximately two years later, Altavion learned of KMSL’s patent applications and, in response, filed a lawsuit alleging thatKMSL had misappropriated the general design concepts of Altavion’s DST, as well as the algorithms and source code internal to DST. Altavion was successful in its claims at trial, and was awarded economic damages of $1 million and attorneys’ fees and expert fees and costs of approximately $3.3 million.

The appellate court affirmed the trial court in its entirety, and although it issued a lengthy opinion that addressed many issues, a couple of the issues are worth highlighting. First, the court explicitly held that, under the California UTSA, “ideas” may be protected as trade secrets. In doing so, the court delved into a lengthy discussion of the differences between the protections of trade secret law and patent law, concluding that “if a patentable idea is kept secret, the idea itself can constitute information protectable by trade secret law. In that situation, trade secret law protects the inventor’s right to control the dissemination of information.” Id. at 56 (alterations omitted).

Second, the court determined that the DST concept as a whole was a protectable trade secret and also determined that Altavion’s specific design concepts were a protectable trade secret. Significantly, the court held that the design concepts were a protectable trade secret even though the design concepts might be evident to a software end user, because Altavion did not disclose its DST design concepts to anyone other than KMSL (and did so pursuant to an NDA).

Overall, the case is a good reminder to practitioners (and inventors) that trade secret law may offer legal protection for ideas that have not been reduced to a patent. Obtaining a patent is invariably an expensive and time-consuming process. Even if obtained, the protections offered by a patent may be insufficient. Indeed, as the Altavion court noted, “because a substantial number of patents are invalidated by the courts, resulting in disclosure of an invention to competitors with no benefit, many businesses now elect to protect commercially valuable information through reliance upon the state law of trade secret protection.”

Of course, if you are going to rely on trade secret protection, be smart like Altavion—actually keep your information secret—meaning only disclose to others, if at all, through a non-disclosure or confidentiality agreement. And, even if you employ an NDA, inventors should investigate following failed negotiations whether their protected ideas are being commercially exploited.